Brexit – How Will it Impact UK Relations Outside the EU?

Brexit – How Will it Impact UK Relations Outside the EU?

Since the votes were cast in June 2016, Brexit has dominated headlines with commentators far and wide projecting what this means for the UK domestically, its relationships with other EU states and its relationships further afield. But the only thing that is clear amid all this confusion is that… no one knows.

As we enter 2017, we are only just starting to get a feel for what Brexit will look like. Given Prime Minister May’s explicit declaration in her much anticipated speech on 17 January 2017 that her Brexit proposals “cannot mean membership of the single market”, a ‘hard’ Brexit is looking increasingly likely. It is now anticipated that the UK will leave both the single market and customs union. This should certainly put an end to the free movement of people and this, in itself, may impact non-EU countries, many of which will be keen to step in to attract the talent that the UK seems so determined to shut out. That said, the newly elected US President Trump is expected to adopt an equally hard line on immigration and this could have an even bigger impact on global talent pools.

In her speech, May also pleaded against a “punitive” reaction to Brexit from the EU, whose members have so far seemed determined to play hardball, arguably to discourage other member states from leaving the union. Despite May’s requests, it is a distinct possibility that the terms of exit will be unfavourable for the UK, maybe even triggering recession, especially given the weakness and division among the political establishment. This could have potentially damaging consequences for the UK on the world stage. Economic woes would make the UK less attractive as a trading partner and recipient of investment, and the expected difficulty and slowness of concluding trade deals would erode international confidence in the UK even further. However, given we do not yet know the terms that Brexit will take, none of this is set in stone.

Pro-Brexit groups are more optimistic, arguing that the UK has a unique opportunity to enter into new bi-lateral trade deals to breathe fresh life into the economy, including deals with countries that do not currently have agreements with the EU – most notably, the US and China. The UK is indeed an attractive market, being the world’s sixth largest economy and benefiting from the dual advantages of labour market flexibility and an educated workforce. Furthermore, the attractiveness of the UK will be accentuated if the EU itself starts to fall apart. Given Italy’s recent referendum and uncertainty surrounding the French election, the future of the EU is far from secure, so perhaps the UK will benefit from being ahead of the curve and jumping ship first. Of course, the big risk to securing these lucrative deals is the UK’s dearth of experienced trade negotiators, given that, to date, all deals have been negotiated through the EU.

Looking to the US as a potential trade partner, the UK can take comfort in the Trump administration being favourably disposed towards the UK and promising a swift agreement. In stark contrast to Obama putting post-Brexit UK “at the back of the queue” for a new trade deal, Trump’s advisor suggested the opposite, backing a free trade deal with the UK to show America’s “solidarity with our indispensable ally” but many doubt the firmness of this commitment, given President Trump’s deeply protectionist instincts.

A key region in which to seek out trade deals is Asia, home to the world’s fastest growing economies. Particular focus must be placed on Japan, the largest Asian investor in Europe. However, the Japanese government has already signalled concerns about a ‘hard’ Brexit. As it stands, Japan’s region-wide operations are concentrated most intensely in the UK, which hosts over 1,300 Japanese firms who provide nearly 140,000 jobs to UK workers. London has been Japan’s commercial gateway into Europe for over a century and hosts the European headquarters of most major Japanese firms. There is obviously a lot at stake, so the memo from Japan’s foreign ministry outlining a series of demands and stating that firms might want to move “if EU laws cease to be applicable in the UK” is deeply troubling as a starting point for negotiations.

China has less to lose. While an enfeebled UK and Europe will likely have some knock on effects on the Chinese economy, this is a golden opportunity for China to reach a trade deal with the UK and increase its leverage in Europe. But, given President Trump’s apparent determination to play “hardball” with China, will their attention be diverted elsewhere? Or, will Trump’s stance spur them on to rekindle their partnerships with the UK? China has already secured free trade agreements with two states on the EU’s margins, Switzerland and Iceland. It also established the ‘16+1’, an initiative aimed at expanding cooperation with the states of Central and Eastern Europe. Would a further trade deal with post-Brexit UK put them one step closer to the EU?

Negotiations with another Asian giant, India, are expected to be far from straightforward, despite Theresa May’s eagerness to encourage trade. Little progress was made in eight years of EU negotiations, which gives bleak indications for the UK. The recent state visit yielded little and it has become apparent that Indian Prime Minister Modi is a challenging partner. It is clear that the UK cannot rely on the Commonwealth as a fallback option for trade deals, and those who think otherwise are likely to find themselves mistaken.

Russia is certainly a winner from the Brexit and Trump victories. Putin will be delighted the EU lost one of its strongest anti-Russian voices, increasing his chances of securing a deal with Brussels on a range of issues including Ukraine, Crimea and energy supplies. At the same time, Putin can be confident of improved relations with Washington under a Trump presidency (in the short term at least).

Of real concern is that even those countries previously seen as strong supporters of the UK have recently displayed much greater reticence in their stance. The Danish foreign minister summed up the difficulties in the upcoming negotiations when he said, “Brexit has changed it all. Instead of looking at the common benefit and pooling our interest, we will get into a game where all of us look more selfish, more narrow-minded… It is not to our advantage to be helpful and friendly. We would lose out. The more you look at the issues the more it toughens your line.”

But even more surprising was the stance of Australia, a country that has now ruled out even starting negotiations until Brexit is complete. While the Turnbull government is committed to striking a free-trade agreement with the UK, Australia’s trade minister advised he had been told that starting talks before the UK formally cuts ties with the European Union would not be legal.

Overall, this is a highly complex issue. There are lots of known unknowns at the moment but also lots of unknown unknowns. Brexit defies all precedent, so progress is undoubtedly going to be slow. While it is in the interest of all countries to negotiate quick deals and benefit from early mover advantage, political and economic concerns combined with unprecedented uncertainly about the future a global governance pose significant challenges.

Tania Rotherwick

Tania is Chairwoman of APQ Global’s International Advisory Council. Tania holds over 16 years of experience working in the City. She is on the board of Modern Art Oxford, is a fellow of the Sutton Trust, an educational foundation that seeks to improve social mobility through education.